Good day, and welcome to the L-3 Communications Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Michael Cummings of FTI Consulting. Mr. Cummings, the floor is yours, sir.

Michael Cummings

Good morning, thank you for joining us for L-3 Communications' Fourth Quarter Earnings Conference Call. With me are Michael Strianese, Chairman, President, Chief Executive Officer; and Ralph D'Ambrosio, Senior Vice President and Chief Financial Officer. After their formal remarks, management will be available to take your question.

Please note that during this call, management will reiterate forward-looking statements that were made in the press release issued this morning. Please refer to this press release, as well as the company's SEC filings, for a more detailed description of the factors that may cause actual results to differ materially from those anticipated. Please also note that this call is being simultaneously broadcast over the Internet.

I'd like to turn the call over to Michael Strianese. Mike, please go ahead.

Michael T. Strianese

Thanks, and good morning, everyone. Thanks for joining us. We had a strong fourth quarter, underscored by solid operating margins, cash flow and EPS. As always, I'd like to start by thanking our leadership and employees for their outstanding program execution and focus, both were major contributors in helping us deliver solid results that exceeded our 2013 expectations for EPS, cash flow and operating margins.

In 2013, we provided excellent performance for our customers, delivered value to shareholders and continued to position the company to capitalize on emerging opportunities. Our disciplined operational approach and attention to customer priorities helped us finish the year with a 7% increase in diluted earnings per share from continuing operations. Needless to say, the persistent budget issues, including sequestration, as well as the drawdown, pressured DoD sales in each of our segments. While these challenges affect the entire industry, we are successfully working through them.

Net sales for the quarter were $3.3 billion, that was an 8.5% decrease from year-over-year sales. Net sales for the full year were $12.6 billion. We've increased our international and commercial sales by 8% over last year's fourth quarter, and that contributed about 30% of our consolidated net sales, which was up from 25% last year. Our full year results paralleled the fourth quarter's with our net international and commercial sales reaching $3.4 billion in 2013, an increase of 11% year-over-year. As a percentage of consolidated net sales, they increased to 27% for the year and that was up from 24% in 2012.

Our results support our strategy of expanding our presence in priority areas and penetrating adjacent markets. This complements our well-established DoD-oriented business, most of which have achieved #1 and #2 market share positions.

Funded orders were approximately $3 billion, an 11% decrease compared with the fourth quarter of 2012. Funded backlog at year-end also declined to $10.3 billion, that was about a 5% decrease year-over-year. Our book-to-bill ratio was 0.92 for the quarter and 0.95 for the full year. Obviously, we would have liked to have seen it at 1, but given the environment that we're operating in, we're still happy with those results. Our free cash flow for the quarter was approximately $586 million, was very strong, bringing 2013 cash to a robust $1.1 billion.

Moving forward, we now have some clarity on the DoD budget. While the passage of the Omnibus Spending Bill did not eliminate sequestration, it does reduce the sequester cuts to above fiscal '14 and '15. We continued our disciplined approach to M&A with the acquisition of Mustang Technology. Mustang develops and manufactures radar-based sensors and systems for precision-guided weapons, electronic warfare, unmanned systems and other military applications. This acquisition expands our classified business base, and Mustang's proprietary technologies integrate well into our existing business. This is an example of our ability to add complementary capabilities and expand our customer base at attractive valuation levels.

Overall, L-3's agility, diverse business base, broad product mix and sharp focus on customer requirements, position us well to win new contracts, grow our market share and take advantage of new business opportunities. We are executing well on that strategy, driven by outstanding program execution and affordable innovations for our customers. We continue to rightsize our operations to reflect marketplace realities, and facilitate cross-business collaborations that expand our opportunities. Equally important, we continue to deliver shareholder value through disciplined capital allocations. We spend a few minutes on our segments.

In C3ISR, to start, where we have unique and sought-after capabilities that reflect solid long-term positions on a number of priority programs for upgrading and missionizing aircraft. Net sales in the segment decreased about 13% in the fourth quarter compared to the prior year's fourth quarter, due to lower demand for airborne and ground-based network communications systems and decreased army demand for remote video terminals, both related to sequestration and the Afghanistan drawdown. However, this was partially offset by higher sales of ISR platforms to foreign military customers.

We also received ongoing upgrade work on ISR aircraft. On the communications systems side, we received continued funding for a variety of programs, including Global Hawk, Predator, Grey Eagle, ROVER and Hawklink. Internationally, we won new business with awards to design integrated communications capabilities and the integrated platform management system for the Royal Canadian Navy's new class of Arctic offshore patrol ships.

We continue to invest and demonstrate our SPYDR ISR platform. You may recall that similar to the Liberty platform but redesigned to be an export-qualified product. It delivers excellent performance with a extremely high mission capability rate and strong customer satisfaction. We've seen many international opportunities for SPYDR, especially in the Middle East. And we have introduced a new platform, a multi-mission platform, for the maritime patrol market, primarily for international customers.

In Electronic Systems, which is our broadest and largest business segment, we had an 8% decrease in net sales compared with last year's fourth quarter. Declines in the DoD business were partially offset primarily by higher sales for our Marine & Power Systems business, due to increased deliveries of commercial shipbuilding products.

In addition, we are seeing growth in our aviation products, Security & Detection Systems and our SATCOM businesses. During the quarter, we received new orders for the F-35 program, as well as for EO/IR sensors, including new international awards and a major contract to support the Missile Defense Agency's medium-range ballistic missile program.

We also see continued strong demand for products in our Warrior Systems business with new business wins in Italy and other nations. On the commercial side, we have seen increased demand for holographic weapon sights for the sporting and recreation market.

Our Simulation & Training business continues to perform well in both the civil and military markets, including new simulators to British Airways and upgrade work for F/A-18 simulators.

In our Platform & Logistics Solutions segment, the current market environment is one of aging fleets that have a demand for high degrees of readiness. While there have been reduction in flying times and mission inductions -- aircraft inductions rather, there are new opportunities in upgrade and life extension work.

P&LS sales were down 2% for the quarter year-over-year. Sales decreases in our Platform Solutions business were partially offset by increases on the logistics side due to higher volumes for field maintenance and sustainment services for the U.S. Air Force.

In Australia, we continue our work on the C-27J program. And in Canada, our efforts on the CC-150 program continue. Domestically, we extended our work with NASA on the SOFIA aircraft. As you might recall, SOFIA is a Stratospheric Observatory for Infrared Astronomy. We are one of the world's few, if only, experts in aircraft modification at this highly sophisticated level as it relates to aero structure work.

While sequestration-related cuts and reductions have impacted our results, we continue to pursue new opportunities in these and adjacent markets, such as logistic services for ground vehicles where we continue to expand our base and grow.

And finally, our National Security Solutions business continues to face industry-wide pressure due to budget issues, sequestration and drawdowns in Iraq and Afghanistan. Net sales with -- compared with the fourth quarter of 2012 were down by about 11%. However, we're exploring new avenues of opportunity for this segment. We have obtained new work with one of our intelligence customers growing our participation over the last quarter by winning an ID/IQ contract as a prime contractor. NSS also received an extension worth $140 million on the EPM II program to provide cyber support work in information assurance and [indiscernible].

Funding on several additional programs continues, including IT support work at the Johnson Space Center for NASA, as well as a variety of county and municipal customer projects. We've also earned positions and received strategic task orders under several long-term ID/IQ vehicles, including the Joint Deployable Intel Support System; National Maritime Intelligence Center, IT Enterprise Support program; and the GSA's Reserve Component Automation program. We also received additional funding for operational intelligence on 2 SOCOM or Special Operations Command contracts. Despite the tough environment here, we're optimistic about the future as cyber work remains a priority and the international focus on security-related issues continues to show signs of opportunities for growth.

We're also continuing to evaluate opportunities for cross-company collaboration and new applications. For instance, applying NSS's expertise to our C3ISR business, which recently resulted in a $30 million award from a classified customer.

Moving on to capital allocation and our M&A, we continue to focus on shareholder value, with a prudent balance of returning cash to shareholders through stock repurchases, dividend payments and a disciplined approach to grow through acquisition. During the quarter, we returned $444 million to shareholders, and that brought the year to $1 billion for 2013. This approach works well. I believe our investors appreciate it and we plan to continue this balanced method of rewarding our shareholders for their trust and support.

While M&A activity in our industry has been somewhat subdued during '13, we've used this time to carefully weigh opportunities and take advantage of good valuations on companies to complement our existing businesses. Our approach to acquisitions focuses on businesses -- that align well with our growth strategies, add new products or technologies, expand our addressable markets and deliver attractive returns.

I'd like to take a few moments to comment on our budget environment and the continuing impact on the industry. The fiscal '14 Omnibus Appropriations Bill enacted by Congress and signed by the President eased the effects of sequestration somewhat for fiscal '14 and partially for fiscal '15. Much of the additional funding in fiscal '14 from the anticipated sequester levels to the level of the omnibus agreement was in the O&M accounts of the services. Additionally, in recognition of the difficulties around the world, the OCO accounts were actually increased from the requested amount in the President's fiscal '14 budget to the omnibus level.

It's looking at the fiscal '15 budgets submission to Congress will probably be submitted the 1st week of March. The total DoD base budget for '15 appears to be roughly flat from the enacted '14 level. That said, these agreements offer a measure of stability for L-3 and the industry at large. Despite some remaining uncertainty, our core businesses, including ISR and aircraft modification and sustainment, are well-aligned with the country's national security priorities and provide a level of stability to our business base.

A tight budget environment creates opportunity for weapons system sustainment and Service Life Extension Programs, upgrades and modifications to existing and legacy programs also. These are all areas where L-3 excels. As mentioned, the FY '14 omnibus agreement increased funding in the OCO accounts, with most of that funding allocated to O&M accounts. This is an area where L-3 has provided quick response solutions for the Warfighter.

We also specialize in maintaining these critical capabilities around the world. There is no question that sequestration remains a challenge to the industry. However, L-3 is a strong and agile company, with outstanding employees, operations, financial strength, and a focus on affordable and innovative technologies. We are operating at high efficiency and continue to position ourselves for positive growth.

With that, Ralph will take you through the fourth quarter financials and cover the outlook for the balance of '14, and then we would look forward to taking your questions. Ralph?

Our fourth quarter results exceeded expectations, that is our expectations, with diluted earnings per share of $2.17, and that was more than $0.20 better than we expected, primarily due to higher sales and operating margin.

Fourth quarter sales were $3,256,000,000, putting the full year 2013 sales at $12,629,000,000, which was above the high end of our 2013 sales guidance range. Sales rose almost $100 million more than we anticipated in the fourth quarter, and the majority was in the international and commercial customer categories.

Consolidated fourth quarter operating margin was also very solid at 10% and also better than we expected, and it lifted the full year margin to 20 basis points above our guidance to 10%. The improved margin was driven by higher-than-expected sales and cost-takeout measures, especially in Electronic Systems.

C3ISR margin increased to 9.1% in the fourth quarter, improving 70 basis points sequentially from the third quarter. Next year, we expect C3ISR core margin to improve to at least -- by at least 80 basis points, and I have more to say about that in a few moments.

The last point I want to make about 2013 is that our free cash flow was also very robust. It totaled $586 million in the fourth quarter, resulting in full year free cash flow of $1,066,000,000, and an earnings to cash flow conversion rate of 137%, with free cash flow per share of $11.70.

Moving on to 2014 guidance, which we formally provided today. That guidance is based upon everything we know, including the recently appropriated FY '14 DoD budget.

Diluted EPS is in the range of $8.15 to $8.35, and is $0.15 higher than our preliminary outlook that we gave on October. The increase is primarily attributable to lower pension expense, partially offset by a higher diluted shares outstanding and a higher tax rate compared to the preliminary outlook.

For consolidated sales, our guidance range is $11.9 billion to $12.1 billion, which is about a 5% decline versus 2013. In terms of the end customer categories, we expect our U.S. Government and DoD business to decline somewhere between 8% and 9%, including $300 million of lower sales related to the Afghanistan drawdown. The base DoD business is probably going to decline by about 7%. We expect our international and commercial sales to grow in the mid-single digit range, which is slightly lower than the 2014 preliminary outlook we provided in October, and that's due to the higher-than-expected international sales that we had in the fourth quarter of 2013.

Regarding the 2014 segment guidance, we expect the sales trends to be similar to what they were in 2013. C3ISR is expected to decline by about 7% or $240 million. Communication systems are declining by about $140 million. And the Afghanistan drawdown is causing the remaining decline, and that's all on small ISR aircraft. Electronic Systems will decline by about 4% or $200 million. Again, the drawdown, here it's EO/IR turrets, are causing a reduction in sales of about $100 million. And other DoD sales are declining by about $175 million due to lower sales on SATCOM terminals, Precision Engagement, night vision equipment and shift maintenance work. Offsetting these DOD declines is growth in commercial and international of about $75 million.

With respect to Platform & Logistics Solutions, we expect sales to decline 2% or about $40 million. The DoD business will be down about $180 million, that's due to the U.S. Air Force JCA completing, reduced U.S. Navy P3 sustainment work, lower Fort Rucker maintenance and other logistic support work. Offsetting those declines is growth in international and commercial of about $140 million led by the Australian C-27J.

For NSS, we anticipate lower sales of about 11% or $150 million for 2014 versus 2011 -- I mean, versus 2013. And the Afghanistan drawdown is reducing sales by about $90 million. The balance of the reduction is due to a few contract converting to small business set asides. And then our new business wins that we had last year are growing about $100 million, but they are being offset by sequester budget cuts and some contracts nearing completion.

For operating margin, we expect an improvement of 50 basis points to 10.5% for consolidated margin in 2014. That includes an 80 basis increase -- 80 basis point increase for low pension expense, which is about $98 million less than it was in 2013. And the pension expense for next year or 2014 is based upon a discount rate of 5.03% and a very impressive asset return that we had last year of 20.4%.

Partially offsetting decline in pension expense next year will be a moderately lower core margin of about 30 bps stemming from certain sales mix changes, particularly in Electronic Systems. We're also factoring in about $15 million of severance costs for 2014, and that's lowering the 2014 margin by about 10 basis points. That said, we're redoubling our cost reduction and our contract performance efforts for next year with the intent of exceeding our margin guidance.

Similar to 2013, we shared the most margin upside potential in Electronic Systems due to several structural reasons. The tax rate for 2014 is expected to increase to 33%, primarily due to the Federal R&E tax credit expiring at the end of last year.

And lastly, with respect to 2014, we expect to generate $1 billion of free cash flow. With respect to capital allocation, we're presently assuming share repurchases of $0.5 billion and no debt repayments. Since we ended 2013 with a cash balance of a $0.5 billion, after the 2014 dividends and the $0.5 billion of share buyback, we will still have excess cash to deploy in 2014, and that's going to be about $600 million, excluding cash overseas of about $230 million.

Finally, I have a few points on the 2014 first quarter outlook. We expect sales to be in the $2.9 billion to $3 billion range, margin of around 10.0%; EPS coming in somewhere between $1.90 and $2 per share; free cash flow is going to be in the range of $0 million to $50 million; and the book-to-bill for the first quarter, we expect to be about 0.93.

So to conclude my financial review, the DoD environment remains challenging. But on the positive side, with the recent Ryan-Murray budget deal, the DoD budget will likely bottom in 2014 or very close to a bottom in 2014. We continue to effectively manage the defense down cycle and are making progress. We're resizing our businesses and reducing costs, while growing our non-DoD business and increasing market share. The company is strong and healthy, and we continue to generate robust cash flow, which we are allocating to increase shareholder value.

Thank you, and we'll now go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question we have comes from Noah Poponak of Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

I just wanted to sort of ask, Ralph, I know you just kind of gave a lot of a detail on the revenue outlook here. But when I first looked at the number, you had said -- preliminarily said $12 billion. Then you got a budget deal after that. It would have made me think you felt a little better than what was maybe your conservative view and now you have a range that sort of just brackets that. I'm just sort of wondering if you can talk about maybe what's some of the upside drivers are to what you've embedded, whether it's recompetes, where you're not being incumbent, or just sort of whether or not there is conservatism in that view?

Ralph G. D'Ambrosio

Well, I think our sales guidance for 2014 is conservative in the same sense that it's been for the last couple of years when we initially introduced guidance. And we always come out with a range of around $200 million. We midpoint-ed it at $12 billion in October when we gave the preliminary outlook. That said, we definitely believe we have potential sales upsides for 2014 as a consequence of the recent budget deal, which seems to be adding more budget dollars to readiness and operations and maintenance-type work to the Department of Defense. And you may recall that we generate about 65% of our DoD sales from the O&M account. Additionally, the increases to the OCO budget should also potentially give us upside for sales in 2014. You mentioned recompetitions, and the good news for 2014 is that we don't have any single major contract recompetitions for this year. Our biggest recompetition is a program in the NSS segment, which has an annual sales run rate of about $120 million, but only $40 million of sales are at risk in 2014 given the timing of that new contract and when it's expected to be awarded. So I think that answered your questions.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Yes, you did. Are there any other -- did you have any other recompetes that start in 2015 that we can start to look at or no?

Ralph G. D'Ambrosio

Well, nothing large in '15 either. I mean, the next multi-$100 million contract that will recompete will be when Fort Rucker gets recompeted 2 or 3 years from now. So the good news is we don't have any, like I said earlier, any significant single contract recompetition risk for next year or into '15.

Michael T. Strianese

Actually I'll add in on that, Noah, that there is some upside in that there are other contractors who have recompetes coming up, where we will be aggressively in pursuit. Again, that's fixed out in my mind, so I'm not cryptic about, would be the JOG program that's due to come up in the next several years, 2 years I think. See the forecast. So if you remember, that was a large program here at L-3. We'd love to win it back.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Great. And then just drilling down into -- to C3ISR specifically, we're now looking at a second consecutive year with a sort of mid- to upper-single digit organic revenue decline. I know there is program specifics driving that, but there are also sort of higher-level reasons to expect that to be a business that outgrows the industry average over time. Is 2014 the bottom, and how should we be thinking about the beyond '14 sort of average growth rate?

Ralph G. D'Ambrosio

Well, we do think that the growth rate is going to improve in C3ISR after 2014, and there may very well be a bottom. Now what's happening this year is a, really, continuation of what we began to experience in 2013, with the significant reductions in UAV communication systems, which is in line with the declining DoD budgets for most UAVs. And then the rest of it has been the drawdown from Afghanistan. And we'll still have some drawdown to happen after 2014. But the ISR Systems part of the business, which is 2/3 of the segment, is essentially stable or flattish in 2014. And we see a lot of potential there the next few years to grow that business internationally, both on -- both with respect to small and large ISR aircraft.

Operator

Next, we have Carter Copeland of Barclays.

Carter Copeland - Barclays Capital, Research Division

Mike, I just wondered if you might comment a little bit on M&A now that we have the Omnibus Bill, and obviously, there's some commentary around clarity and stability, and what that might mean for M&A activity versus the subdued level you talked about in 2013. Is it your expectation that activity will be higher in '14 versus '13, or is that still limited by valuations that are high at this point?

Michael T. Strianese

No, no, I honestly -- personally, my view is that you will see an increased level of activity. I don't know if it goes back to where it was in the pre-downturn sequestration days yet because you're still dealing with, Carter, the -- we've got some clarity in '14, most of '15. '16 and '17 are -- we're hopeful that they are -- continue to grow, it's hard to make that call at this point. So it depends on the type of company one is looking at and the length of its backlog and all, that is a lot of factors. But you're absolutely right. There is more clarity now than there's been in the past several years, and I would expect to see a step up in the amount of transactions. Certainly, the small- to middle-sized companies, when we get to the very big deals, that's I'll defer to most of you in the banking world as to what you see there could cause if those deals are few and far between. But again, I think you'll see a step up in the activity.

Carter Copeland - Barclays Capital, Research Division

All right. And this may be a difficult question to answer, but I'm wondering, if you look forward to the '14 outlook in the domestic business and you look at what you're anticipating by service, if you could kind of give us some color around what you're expecting for the Army versus the other services, and try to give us some color around how that's shaping the outlook for this year?

Ralph G. D'Ambrosio

Well, I will tell you that I said that we expect our base DoD business or the base budget DoD business to decline by about 7%, and most of the declines are in the U.S. Army, including -- and that includes obviously what I talked about in the segment commentary. So most of the communication systems declines is Army-related, the same thing for the SATCOM, EO/IR and even the Precision Engagement, which is fuses in guidance-type equipment. Most of it is from the U.S. Army.

Carter Copeland - Barclays Capital, Research Division

And are those things that -- when you put those kinds of declines in for the Army, are those things that basically hit kind of bottom run rates at this point given how much they're down, or how are you thinking about that?

Ralph G. D'Ambrosio

We think they are approaching bottom levels.

Operator

Next, we have Joe Nadol of JPMorgan.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Mike, I just wanted to follow up on the M&A question Carter asked and really get more specific to L-3. You guys obviously, it's, I guess, the life of the company, you've had 2 different major time frames, one, you're very acquisitive. The last few years, which is most of your tenure as CEO, has been much more focused on returning cash to shareholders. You mentioned that you think transactions are going to pick up and I think that's in line with my expectation and the broader expectation. So what's -- can you put any parameters around what your appetite is for L-3, not necessarily in 2014 but just in the coming years? Are we going to see a lot of what we've seen in the last 5 years from you, or is there possibility you could do a $2 billion deal?

Michael T. Strianese

I wouldn't rule out a $2 billion deal. I'll tell you, the chances are pretty low just based on the availability. I mean, we're pretty well-versed in what is out there and what we think would fit. And the possibility of doing something that would be a real stretch in terms of fit is pretty unlikely. We've been very almost surgical in our approach in -- Joe, we probably waded through 100 books over there each of the last couple of years and ended up with 1 or 2 deals. I mean, we've been very, very disciplined and more than willing to wait out the cycle but also to be prepared to take advantage of things as they come up. I mean, the goal would be to continue to build on our very strong core positions and, of course, not weaken the company. But when you look at valuations over the past few years and the uncertainties in the budget, returning cash to shareholders is really, in my view, the exact right thing to do for that point in time. So we would like to continue to grow the company, but it will be using the same discipline that has been employed in the last few years. The types of deals that -- I mean, Mustang was below $100 million, maybe $50 million-ish type size.

Ralph G. D'Ambrosio

It's $54 million.

Michael T. Strianese

It's $54 million, Ralph, okay. So I mean, I'd like to see the deals a little bit beefier, a couple of $100 million, or probably not $2 billion either, on a more risk-mitigated approach, where it's more of a exact fit within one of our business segments that really grows it and brings more synergy and customers to the table for us.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. Yes, no, that's helpful. I guess if you were to get bigger, by definition, it would be less surgical and you said you wouldn't want to really -- it would have to be a good fit, so how do you think about what fits L-3 at this point because you've gone through several life stages as a company and evolved over time. Is it a prime contractor versus subcontractor types of capabilities, how would you define a core fit right now?

Michael T. Strianese

Well, if it's in the primary, it will be in a very, very close adjacency where it would bring, what I would call, cross-selling to us. We would be able to access new customers that we don't currently have. At the same time, the target company would have access to our customers and it will just give us a broader market, and perhaps integration of technologies in each of our respective products to end up with -- in a better place. If it is not at a prime level, if it's more of a technology play that would give our already leading products more market penetration in terms of capability. I mean, really, the way we win the day is delivering substantial -- substantial capability, market-leading capabilities, at what I like to call disruptive prices. I mean the prices that you would just not going to get a lot of competition at and there's a lot of ways that we do that. But if you look at what the price point that we'll be at once it's out in the marketplace with the SPYDR or with the multi-mission aircraft that I talked about, I'm talking about delivering capabilities that are in the very, very rough number, 80%, 80% plus of the larger platform. It's like a -- 30%, 40% of the costs, so very different model. And also, what we're doing in that regard is we're bringing product to the market, we're not bringing Power Point slides. We're actually it's -- this is fly before you buy. I mean, we're bringing a product, and investing on our money. So to the extent there are companies out there that will fit in that model in helping us get even more disruptive capability at the price points we like to come in at, those are going to be great fit. Mustang is a great example. I mean, Mustang Technology is tucking into several places across our company and they bring a cadre of classified customers that we didn't have access to. I just like -- I like it, I like it to be bigger. If you want to know what I really liked over the last few years, I really like the Thaless Simulation & Training business we bought in the U.K. That was a great example of what's prime, right? And that it had its own book of business with commercial customers, yet a lot of the underlying technology, had a lot of similarity to what we do on the military side. So we were able to really cross-pollinate on the technology side, great fit for us. I wish there were more like that, but there are a few and far between. But we are patient. We don't really jump for the sake of adding just a few bucks of sales. We jump when it's a real business opportunity that we see as more than a 1 and 1 is 2.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Got it. Okay, that's very helpful. Ralph, just on the 5% of Iraq and Afghanistan that you're anticipating you're going to have this year, as we think about the bleed-off of that after this year, what are the biggest chunks of it and what segments are they in? C3 has been hit by this, but it sounds like the rest of it is other segments?

Ralph G. D'Ambrosio

Well, so I said that we expect the Afghanistan OCO sales to decline by about $300 million '14 versus '13. And that works out to about $650 million of sales in 2014. And the substantial majority of it in 2014 is in C3ISR dealing with the small ISR aircraft, the biggest one being Liberty. So that's where most of it is. There's a little bit remaining in NSS in 2014 around $40 million and almost nothing in the other 2 segments.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

So what gives you the confidence to say that 2014 could be a bottom for C3 despite that pretty chunky run-off in future years?

Ralph G. D'Ambrosio

Well, first of all, we don't expect it to run down to 0 because we see other demand and markets or engagements emerging where they're going to need and use small ISR aircraft. So it's really an excellent product, Liberty, for example. And then we think that it's going to have alternative uses. And the last time we talked about our Afghan OCO exposure, I said that I expected it to bottom somewhere between $300 million and $400 million in the 2015 to 2016 time frame. If anything, we think the additional hundred dollars going to OCO, it's closer to -- likely even be closer to $400 million, I would say, at this point. So I think that reconciles what I said about the outlook for C3ISR sales.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay, that's very helpful. And I just have one more. Just on C3, you guys have done a lot of restructuring. You faced tough environment here post-war, I guess, or as wars wind down. The margins are recovering next year, but a lot of it is -- or this year, I should say, but a lot of it is pension, if you look back and look at the longer-term profile, you're in the 11th before without all this pension income and with pension expense. Is there more upside to margins as sales stabilize here or is this just that mix has shifted so much that you're never going to get back to where you were?

Ralph G. D'Ambrosio

Okay. So I said we expected the core margin to increase 80 basis points in C3ISR for 2014 versus 2013. That's roughly $25 million of additional operating income. And the short answer to your question is that we expect further margin improvement in C3ISR and it's not contingent upon additional sales. We made a significant investment last year in comp systems in the form of new ERP systems. Those systems, in terms of transition from the legacy systems, they've been stabilized at 3 new system productivity levels. We're not done. That's just the beginning. We expect to drive significant productivity improvement from those systems not only in '14 but also in '15. And we've tasked our management team there to achieve that. We're all focused on it and we're confident that we're going to realize more margin improvement as a consequence of that. So I have high hopes for the margin improvement -- improving in C3ISR.

Operator

Next, we have George Shapiro of Shapiro Research.

George Shapiro

Just a couple of little ones. Can you break out the growth rates in the international and commercial? I mean, you said the total was 8%, but how does it break out each?

Ralph G. D'Ambrosio

Well, I said mid-single digits. So commercial is going to be somewhere around 3% to 5%, and the international or foreign government work is going to be somewhere in the 5% to 7% range.

George Shapiro

Okay. And then just in general, each year, you start off saying you're going to buy back $500 million worth of stock...

Ralph G. D'Ambrosio

Yes, I know what we say, George.

George Shapiro

Each year, you wind up buying a lot more. I mean, is that just contingent on what M&A you wind up doing, otherwise, it goes to share buyback?

Ralph G. D'Ambrosio

Yes, contingent upon the M&A opportunities that were talked about in good detail by Mike a minutes ago. And it's also contingent upon the cadence of our cash flow from quarter-to-quarter. So the more cash we generate, the more inclined we'll use it -- to use it to go buy back our stock. So we think it's prudent and it makes good conservative sense to start with a $0.5 billion share repurchases assumption at this point in time. But like I said, we're going to, if all goes well and we generate our free cash flow, which we expect that we will generate, we're going to have another $600 million of excess cash to deploy and we'll deploy it.

Michael T. Strianese

And also, George, I mean, at this point in the year, I mean, we'd love to see a couple of really meaningful deals, the ones I just discussed with Joe's question. And -- but it's very hard to call in terms of the timing and things, so it -- rather than going the other way and reducing share repurchase, this seems to always make sense to us and we'll adjust as the year goes on. I also think that as a result of some of the pension performance, we have more capacity in the balance sheet. So it's certainly -- we're in a very, very good positive position right now in terms of capital allocation going forward, where we, quite honestly, could probably do both this year, exceed the share repurchase, as well as do acquisitions at similar levels, as far as share repurchases, as getting very close to levels we've been operating at.

Operator

Next, we have Myles Walton of Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

I just wanted to focus on an ES for a second. Ralph, I think you said in the remarks there were -- there was more upside there on the margin side due to structural reasons. I was hoping you could explain some of those, is it that more volume leverage or the cost capture -- cost savings that you can capture? And then longer-term, what's the potential margin of that segment with the kind of mix you have, and assuming -- let's assume that the airport security doesn't have a revitalization, but just kind of the business you have and [indiscernible] you have, can you get back to that 13%, 14%, or is does that helped a little bit too much by this commercial businesses?

Ralph G. D'Ambrosio

Okay. So I said there were several structural reasons why I think we should be able to continue to improve or increase the margin in Electronic Systems. And what those are is, number one, most of our business in this segment is fix-priced and competitive in nature, which means that we're able to retain the cost savings that we met -- that we achieve. Secondly, less than half the business is DoD. So for 2014, in our guidance, 48% of the sales are coming from the Department of Defense. The balance is mostly in international or foreign government and commercial work and we have -- generally, we have higher margin opportunities in those end markets. And secondly, we still have a good amount of consolidation opportunities that remain in Electronic Systems, especially compared to what the opportunities are in the other 3 segments. So for those reasons, we believe we can continue to drive the margins higher. And we like to get to 13% and 14%, but that's going to take some time, but we clearly have the ability to get to those levels the next few years in Electronic Systems.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then, Mike, on that kind of consolidation or taking out costs theme, NSS is -- you've shown good performance on the cost side, taking down costs. But obviously, the market and the volume working against you is now 7% of the company is earnings, and from your opening remarks, it sounds like you're pretty committed to stick with it. But is there more sense now though to consolidate it? Is there a kind of a cost capture of consolidation of that business rather than have 7%?

Ralph G. D'Ambrosio

Yes. No, Myles, we are looking at several things on the consolidation side. We -- I'm going to give more color on that topic, if you're to be patient, a few weeks on the Investor Day, we assemble those data. The things that I'm looking for in the NSS business, again, is, one, we've been transitioned -- after the -- post the Engility spin-off, we've been changing the focus to be a solutions provider for national security, obviously. So there have been a number of ID/IQs last year that they have won that should provide some upside if they can win the task orders, it's very price competitors so we are taking more cost out in that regard. And the other thing is there are synergies across the company. In other words, using some of the NSS capabilities in our ISR business that we're working on. There is a bit of a task when you take a -- more of people-oriented service business and try to mash it together with a manufacturing shop. There's a lot of different dynamics in how things are costed and the like. So that might not be the way we go on it, but you can rest assured, it has our complete focus in terms of, all right, we're not getting the sales growth we want to see yet, but we're certainly getting the margins up and it should be poised. In fact, if you take the effect of the sequestration and drawdowns out of their numbers and look, what's happening in the core, they're actually not bad. They're doing pretty well. They're certainly doing, I would say, doing better than the rest of the industry when you eliminate those effects, which points to winning some market share, and that tells me that we have a good offering and we're competitive with the rest of the industry, and that's what keeps us in the game here. So I'd really like to be telling a better story here, but I do think it's not quite bottom but very close on the top line and we're going to see better margins going forward.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. One cleanup, Fort Rucker, so if the Army decides to restructure its aviation kind of between the guard and the active in the way that they're talking there. What, if any, impact is there to your Fort Rucker contract in the 2014 period?

Ralph G. D'Ambrosio

We don't expect -- I said that we expect lower sales on Fort Rucker when I gave the sales outlook for Platform & Logistics Solutions, and that's a sales reduction of about $30 million. And we don't really see anything beyond that happening in 2014. If anything, the Army's is going to come out committed to funding the Fort Rucker aviation training operation. So I don't think we have any kind of meaningful additional sales to try and risk there in 2014. And since we're on a topic of the Army, I want to provide some details so that you understand what our Army exposure is. So although we didn't talk about it today, the DoD comprised 68% of our sales in the -- for 2013. And our guidance for 2014 contemplates the DoD will represent 65% of sales for this year. The Army last year was 19% of sales and it's going down to 15% or 16% of sales in 2014. So I don't see a lot of downside to Army sales beyond 2014 and that's something we -- a couple of folks asked about earlier in the call.

Operator

The next question we have comes from Cai Von Rumohr of Cowen and Company.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

So could you give us -- actually, you gave us the percentages, because some of these numbers are smaller, it's hard to kind of figure out exactly where you are, but where you were in sales for OCO commercial and foreign government? And then you gave us the percentage changes. Maybe give us some other granularities like what are the elements in those changes that are getting us to the 3% to 5% and 5% to 7%?

Ralph G. D'Ambrosio

You mean the commercial?

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Well, the commercial and then foreign government.

Ralph G. D'Ambrosio

You want me to cover the whole company sales profile. I don't think I have enough time to do that right now, Cai.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay. So maybe just give us the base if you could?

Michael T. Strianese

So the commercial and international sales, we expect to grow somewhere in the $150 million to $175 million range, possibly a little higher. A little more than half of it is coming on the foreign government sides. I talked about the key driver being the Australian C-27J. Other increases are in night vision and Sensor Systems for Middle East and European foreign government customers. Those are programs that we won in the second half, in the fourth quarter of 2013. Offsetting some of those -- some of that growth is the U.K. air secrecy on decline in '14 versus '13, and be about the same in 2015. And on the commercial side, the growth is happening mostly in avionics, Security & Detection Systems and also in our microwave SATCOM business, where we do the power devices or traveling wave tubes that are used on satellites.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Okay, very good. And then the last one. You had some disruptions in 2013 from ERP implementation at C3. Do you have any more ERP implementations to happen in 2014?

Ralph G. D'Ambrosio

We do have some, but they're very -- they're significantly smaller in scale. So they don't have the potential to cause what happened last year again in 2014.

Operator

Our final question today will come from Robert Spingarn of Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

I guess I'll go with the high level one. Mike, Ralph, I don't know which one of you wants to take this. But we've talked throughout the call about the mini deal and about your favorable mix on the short cycle side, you talked about good exposure to the areas that we'll get some upward funding relative, right? That's AM&M and CISR. So from a high level, how do you want to think about bookings throughout the year? Ralph, you gave the first quarter book-to-bill, but I'm thinking all year, just the bookings in revenue cadence for the segments as we go throughout 2014, to get a sense of where the bottoms really are, those that you can see?

Ralph G. D'Ambrosio

Okay. So for the full year, we're expecting a book-to-bill ratio of somewhere between 0.98 and 0.99.

Robert Spingarn - Crédit Suisse AG, Research Division

That's pretty specific.

Ralph G. D'Ambrosio

Which is better than it was in '13 and also suggesting that we're nearing the bottom in terms of top line.

Robert Spingarn - Crédit Suisse AG, Research Division

But it also suggests that maybe the bottom is a '15 because it's not 1.0?

Ralph G. D'Ambrosio

Yes. And that's -- and we said that we bottom in '14, will be close to a bottom in '14. So I think it's the same thing.

Robert Spingarn - Crédit Suisse AG, Research Division

Well, it is. And can you talk about that on a segment basis?

Ralph G. D'Ambrosio

Meaning, for beyond '14?

Robert Spingarn - Crédit Suisse AG, Research Division

Well, I want to think about the revenue profile of the segments. You've got downward growth in all of the segments, but the magnitude varies. And so given that some of them have short cycle exposure and others, long cycle, how do you think about where each would find that bottom, so we get a sense when we start to consolidate, build the bottom and get constructive in each unit?

Ralph G. D'Ambrosio

Well -- so I prefer not to start calling bottoms, but let me give you what I think is going to happen directionally. So I think that once we get to 15, certainly, the rate of decline is going to decelerate meaningfully at NSS and C3ISR, and I'd say the same for Electronic Systems, which is declining at a much lower rate in 2014 compared to those 2 segments. And Platform & Logistics Solutions is almost flat in 2014, down a couple of percent at the midpoint. So I see the sales on the profiles improving in all 4 segments beyond 2014.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just to maybe get a -- that's very helpful, but a little bit more specificity, which quarter would be your smallest sales quarter this year? The normal seasonality or you see it a little differently given the budget gyrations?

Ralph G. D'Ambrosio

No. I don't -- I think the sales profile is going to be flatter.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. So about $3 billion a quarter, you said $2.9 billion to $3 billion in Q1?

Ralph G. D'Ambrosio

Yes. And I think the -- will have the largest quarterly decline in sales in the first quarter.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just lastly--

Ralph G. D'Ambrosio

Year-over-year.

Robert Spingarn - Crédit Suisse AG, Research Division

Just a clarification question or -- I think, Ralph, in October, either you or Mike had targeted 10.1% margin for '14 when you gave the directional high-level guidance. Now it's 10.5%. Is all of the difference, pension?

Ralph G. D'Ambrosio

Essentially all of it.

Michael T. Strianese

So in summary, our strategy is working well. We continue to deliver shareholder value and expand our customer base. As the results reflect, we continue to manage effectively in this challenging environment by cost efficiencies, delivering consistent strong program execution and earning the loyalty of our customers every day. I believe L-3's agility continues to be an important differentiator in this environment, as well as our program performance, which continues to be outstanding, and that is especially with regard to the ongoing geopolitical uncertainties that could impact our industry. Some of the OCO funding, as you might expect, is not exclusively Iraq or Afghanistan now, there's other parts of the world included there, where there are rapid deployments needed and things going on, where we are uniquely positioned to deliver to our customers and have the extensive experience to do so. We're also expanding -- continuing our expansion into international and commercial areas that are experiencing growth. So as you know, we have an Investor Conference coming up on March 25 and we look forward to continuing these discussions with you then. At that time, we'll have further clarity on many of the issues we discussed today, particularly as they influence the budget. And we'll hear from other members of our management team that can get into more depth on their respective business segments. So with that, I look forward to seeing all of you at the Investor Conference in April -- in March rather, and speaking to you again during the fall -- in April. So thanks very much for joining us.

Operator

We thank you, sir, to the rest of the management team for your time today. The conference call has now concluded. We thank you, all, for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day everyone.

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